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In its third consultation paper on this topic, the FCA has recently confirmed that:

- FSCS claims in respect of investment advice will benefit from an increased compensation cap, from £50,000 to £85,000;

- product providers will have to start making contributions to FSCS funding for insurance and investment advice claims; and

- it proposes new rules to prevent personal investment firms' insurers excluding cover for claims where the firm or a third party becomes insolvent.

In December 2016 the FCA published a paper which consulted on proposals for reforming the funding of the FSCS. A second paper on this topic was published in October 2017 and now, following on from that, on 1 May 2018 (see here) the FCA published a third paper in which it has made final rules which are to take affect from April 2019.

The FSCS is the UK's statutory compensation scheme of last resort for the financial services industry and the question of how its funding ought to be allocated between different firms and sectors is acknowledged by the FCA to be controversial.

As a result of the FCA's recent consultation paper, product providers will now be required to contribute 25% of the funding requirements for the FSCS' insurance and investment intermediation funding classes. In other words, product providers will have to help to pay for failed advisors' misselling of their products. The FCA has confirmed that these plans will include discretionary fund managers as providers.

In addition, the FCA has confirmed it will increase the compensation limit in respect of claims relating to investment advice and provision (and, additionally, home finance intermediation and debt management claims) from £50,000 to £85,000. Again, this will take effect from April 2019. The FCA has acknowledged that this could result in advisers' FSCS levies increasing.

Finally, the FCA paper also includes a further consultation on draft rules to ensure personal investment firms have professional indemnity policies that do not limit claims where the policyholder or a third party is insolvent, or where a person other than the personal investment firm (e.g. the FSCS) is entitled to make a claim. The reasoning behind this is clear, with the FCA confirming "the changes are intended to ensure that more consumer claims are paid by insurers which could help to reduce the costs of the FSCS to other firms."

The consultation will remain open until 1 August 2018, and will no doubt be of particular interest to all firms, whether current or potential contributors to FSCS funding, and to insurers and brokers in the PII market.

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